For agrochemicals, mid-caps keep growth hopes alive for FY18

New Delhi, Feb. 22 -- Relatively smaller firms Dhanuka Agritech Ltd and Sharda Cropchem Ltd are holding out a better outlook for 2017-18. Dhanuka, for example, has guided for 15% revenue growth. Based on current market conditions, Sharda has maintained 15-20% growth guidance.
In comparison, Bayer CropScience Ltd, which like Dhanuka derives most of its revenues from the domestic market, warned about a challenging 2017 for the agrochemical industry. Similarly UPL Ltd, which like Sharda derives most of its revenues from overseas, sounded cautious about near-term growth outlook. Even PI Industries Ltd, which has built an enviable custom manufacturing business, warned about a growth slowdown in the near term.
"In the near term, there could be some instances of custom synthesis offtake being pushed forward, with consolidation among the larger global players posing an added challenge," Investec Capital Services (India) Pvt. Ltd said in a note on PI Industries.
True, the companies are strictly not comparable due to different product baskets, geographical presence and sales cycles. However, if one views the sector from the point of view of growth commentary, Dhanuka and Sharda stand out. Both companies maintained double-digit growth guidance even as the rest became vary of high channel inventory in the local market and slowdown in global agrochemical sales.
So what is helping Dhanuka and Sharda? New products and market expansion. Dhanuka is benefiting from new product launches and expansion into premium brands. According to Edelweiss Securities Ltd, Dhanuka launched seven new products in the current fiscal year and has more launches in the pipeline. "We perceive strong growth opportunity for its product Sempra (used for sugarcane crops) in the next season along with pick-up in recently launched products," adds Edelweiss.
Sharda is expanding its product portfolio and is benefiting by focusing on products that have limited competition. It added 125 product registrations in December and 768 more are in the pipeline in different regions. "Sharda's unique business model is supported by its rising wallet share in existing products and new product launches which would continue to drive growth," Religare Capital Markets Ltd said in a note.
Of course, the relatively smaller base is helping these companies and larger firms may get visibility on growth once the new season starts. Also two analysts say Bayer is conservative about prospects and the outlook is anyway dependent upon rainfall patterns. A normal monsoon will help clear generic products' inventory and lift growth of all companies. In that case (in the event of normal rains), Dhanuka can better its 15% growth guidance, opine the analysts.
The stocks are reflecting the optimism. Dhanuka is trading at 25 times and Sharda at 17 times one-year forward price-to-earnings estimates. While valuations are not cheap, delivery of the growth promise will be crucial for the stocks' performance.